Health Law Complicates Tax Season: What Consumers Need To Know

With tax season underway, some Connecticut taxpayers are struggling with the Affordable Care Act mandate that all Americans must report their health insurance status on their federal income taxes.

“It’s been a big source of confusion for some people,” said Karen Riccardelli of Riccardelli Accounting in New Canaan, who has been helping Connecticut taxpayers understand the law’s requirement that they carry health insurance or pay a tax penalty.

Here’s what Connecticut taxpayers need to know.

Do I need to pay the penalty?

People who were uninsured in 2014 face a tax penalty – unless they qualify for an exemption. The tax penalty for 2014 is $95 per person and $47.50 per child (capped at $285 for families) or 1 percent of taxable household income, whichever amount is greater. The penalty will be prorated if people had health coverage for at least part of the year. The IRS, however, can’t use liens and levies to collect the penalty.

If I am currently uninsured can I buy coverage and avoid a penalty?

Access Health CT (AHCT) – the Connecticut online marketplace created by the federal health law – will have a special enrollment period in April for uninsured people who learn about the penalty for the first time while filing their 2014 taxes. To qualify, consumers must attest that they paid the penalty for being uninsured in 2014 and that they became aware of the penalty after the end of AHCT’s regular open enrollment period.

The special tax-time extension is designed to help people who are paying a penalty for being uninsured in 2014 avoid a similar fine next year because they lacked coverage in 2015. They will still need to pay a penalty for the months they were uninsured in 2015. The penalty in 2015 increases to $325 per person or 2 percent of taxable household income, whichever amount is greater.

How can I apply for an exemption?

The federal government has identified about 30 types of coverage exemptions from the penalty. Some exemptions can be claimed when people file their federal tax returns. These include exemptions based on coverage affordability, membership in a shared health ministry or a federally recognized Native American tribe, or incarceration.

Other exemptions, including hardship cases, require submitting an application and documentation to the marketplace to receive an exemption certificate number (ECN). Getting an ECN can take weeks, so people should apply as soon as possible.

Taxpayers can claim or report coverage exemptions on IRS Form 8965. Individuals who are awaiting an ECN may enter “pending” on the form.

How do I prove I have coverage?

Every taxpayer must prove they had coverage in 2014 that met the government’s minimum requirements for essential benefits.

For people who had employer-based or government-sponsored coverage (Medicare, Medicaid, Children’s Health Insurance Program, Tricare, Veterans Benefits), it’s as simple as checking a box on their tax return to indicate they had qualifying coverage for the entire year. The check box is on line 61 of IRS Form 1040, line 38 of IRS Form 1040A and line 11 of IRS Form 1040EZ.

People who purchased health insurance at AHCT will receive a health insurance marketplace statement (Form 1095-A) with information about the policy, the individuals covered, and whether they received federal tax credits to offset the cost of premiums.

Ricardelli advises state residents to bring their health insurance policy and the 1095A form when they meet with their tax preparer.

How will the premium tax credit impact my 2014 tax return?

Connecticut residents who received a federal tax credit to help pay for premiums when they bought a policy at AHCT must now reconcile the credit against their actual 2014 income. This is done by filing IRS Form 8962 with information from the 1095A Form.

The IRS may owe money to people who overestimated their 2014 income when they purchased coverage. But people who underestimated their income and received too large a credit will need to repay the federal government.

The amount people must repay is based on their income and is capped at $2,500. But individuals whose actual 2014 income exceeded the threshold ($62,920 for couples, for example) must repay the entire tax credit because they no longer qualify for assistance.

The IRS is offering some relief to people who need to repay their excess premium tax credit. They won’t need to pay the late payment if they can’t repay the amount by April 15. They also can repay the sum in installments, but interest will accrue.